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Gustavo Poblete co-authored this blog post with Howard Deutsch.

The Trump administration rolled out a significant policy proposal aimed at reducing the prices that Medicare pays for prescription drugs covered under the Part B medical benefit. While the policy is positioned as a “pilot” covering half the country, it will, if implemented as proposed, bring substantially greater disruption to drug pricing, contracting and distribution than purportedly envisioned by the government. Manufacturers with drugs covered under the medical benefit will need to fully reevaluate their strategies to adapt.

What Does the Proposal Include?

The proposal has two core components: one related to drug pricing, and one related to distribution and reimbursement. For drug pricing, the administration is targeting a 30% reduction in the prices that Medicare pays for the affected Part B drugs, to be phased in linearly over five years. The mechanism for this will involve tying individual drug prices to an average sales price (ASP) paid across 14 countries (Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands and the United Kingdom), and then targeting a payment of 1.26 times that average at the end of the phase-in period. The exact details for calculating that ex-U.S. average (including how to weight it and how to handle situations in which a drug isn’t available in some of those countries) are yet to be determined.

To implement such a price change, today’s distribution and reimbursement model needs to change as well. The administration is proposing to scrap the current “buy and bill” model that requires providers to purchase drugs and then bill Medicare after they’ve been administered. In its place, the Trump administration envisions having third parties take title to the drugs and coordinate distribution and payment on behalf of providers. In this scenario, providers would continue to collect patient co-pays (and remit those to the distributor that provides the drug), but they would no longer be required to purchase drugs and bill Medicare for the cost of drug purchase.

To help maintain provider revenue, Medicare would pay providers a new drug treatment flat fee, a figure set to 6% of the pre-price-reduction ASP for the drug category. Again, the exact details of how this will be calculated haven’t been communicated, but the intent is to, on average, pay providers a little bit more than they were getting under the “ASP + 4.3%” buy-and-bill model that prevails today.

Why Will These Changes Be So Disruptive?

HHS Secretary Alex Azar explained in his remarks at the Brookings Institution that, “to understand the best way to implement” this new system, it’s being rolled out to 50% of the country. But, in fact, 100% of the country will be affected by the pilot due to ASP dynamics.

The government envisions that to meet the reduced “target prices” that Medicare will pay in the pilot, manufacturers will discount their drugs down to that level. Those discounts will, in turn, reduce drug ASP elsewhere and will consequently reduce the amount that Medicare (and many commercial health plans) reimburse outside of the pilot to providers that continue to buy and bill. At the price reduction levels targeted by the government, this will make business as usual impossible.

Let’s consider this simple example: Providers who purchase a drug under the current model with an ASP of $1,000 per dose and 50% of its utilization in Medicare are being reimbursed $1,043. If Medicare realizes its targeted 30% price reduction in the pilot geographies, the ASP will reset to $925 over time. At that point, the non-pilot provider who purchases at $1,000 will only be reimbursed $965, which isn’t economically viable.

This dynamic of pilot program spillover hasn’t been overlooked by the government. In the detailed policy rule proposal, the government explicitly contemplates that discounts provided under the program could affect best price calculations, stating that “such manufacturer sales to the model vendors could potentially lower best price and potentially increase Medicaid rebates. Medicaid programs could benefit.” In Azar’s Brookings speech, he pointed to the ASP effect as well, saying, “As payments within the model are reduced, the average sales price Medicare pays will drop, reducing what patients outside the model pay.”

Further, the pilot program could bring a significant management burden to provider groups. How will a multi-site practice or health system that’s partly in and partly out of the program be treated? And if a provider must continue to buy and bill for some portions of their business, how will inventory be managed? Will the provider be required to acquire and track a particular drug from two different places?

What Are Pharma’s Options?

First, drug companies should lobby against the most disruptive parts of the proposed program. In doing so, they can make common cause with some influential providers who have expressed concern, like the American Society of Clinical Oncology’s CEO Dr. Clifford Hudis, who stated, “We strongly believe that such a demonstration should be voluntary so that this approach can be tested and refined in a manner that best meets the needs of patients.” At the very least, pharma companies and providers have a common interest in seeking to ensure that any discounts offered through the pilot program are not counted in ASP calculations.

But if the program does go into effect as currently contemplated, manufacturers with affected drugs will need to develop revised pricing, contracting and distribution strategies. Here are a few potential options:

  • Walk away. For those drugs with limited Medicare utilization, a manufacturer could decline to offer the discounts demanded in the pilot if doing so would be too disruptive. Making that choice would require the manufacturer to weather the likely backlash while also finding ways to help Medicare patients within the pilot geographies access those drugs.
  • Match prices nationwide. A manufacturer could maintain buy-and-bill viability for non-pilot providers by matching (or nearly matching) the pilot program discounts elsewhere. This would reduce systemic disruption but also would bring about longer-term risk. If manufacturers acquiesce easily when the U.S. government demands a 30% discount, what will happen when that 30% becomes 40%, 50% or more?
  • Identify opportunities to optimize prices. A medical benefit system with higher price increases and higher discounts than historical averages for some provider segments potentially also could maintain system viability outside of the pilot geographies. This would, ironically, represent an importation of the pharmacy benefit’s “high-price/high-rebate” model that HHS has criticized elsewhere, and would also require a manufacturer to stand firm in the face of criticism about list price growth.

No particular strategic choice is ideal, but it’s clear that pharma companies have a range of options to consider when evaluating how to respond to the latest policy proposal. The evaluation will be analytically complex and will require cross-functional stakeholder engagement, given the public relations sensitivity. Pharma has no time to waste in playing out these choices and developing a plan because the administration’s proposed changes could have dire consequence for the industry’s current commercial model. Business as usual is no longer an option.


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Topics: Trump administration, pharma drug pricing, Medicare Part B, Howard Deutsch, contracting and distribution strategies, pricing and reimbursement, Medicare drug price proposal